Analysts project good margins for dairymen

Margins for dairymen are improving and should be strong in 2014 due to good milk prices, lower feed costs and strong exports. Industry analysts are expecting better income over feed costs will spur increased milk production.

Rising milk prices, declining feed costs and strong export demand are painting a profitable picture for dairymen in the short term and in 2014.

Even with an expected increase in milk production and a subsequent drop in milk prices, dairymen are set to realize the second-highest average income over feed costs on record, said Eric Meyer, president of HighGround Dairy, a division of Chicago-based HighGround Trading Group, a brokerage and consulting firm.

Producers will be going into the new year with high milk futures prices and sharply lower feed costs, and the outlook looks good for 2014, he said.

He expects prices for Class III milk for cheese to average $17 per hundredweight and prices for Class IV milk for butter and powder to average $18.41 in 2014. That’s down from 2013 year-to-date averages of $17.81 and $18.66, respectively, but lower feed costs will bring much improved margins, he said.

Income over feed costs (IOFC) should average about $8 per hundredweight of milk in 2014, compared with the $6.74 average from January through September of this year, he said.

Other analysts are expecting even bigger margins.

The widening gap between milk prices and feed prices raised October’s IFOC to $10.57 per hundredweight of milk, based on USDA’s monthly agricultural prices report showing prices received by ag producers.

An IOFC of more than $7 typically points toward an increase in milk production, and the IOFC hit $7.86 in August and $9.43 in September, said Jerry Dryer, editor of Dairy & Food Market Analyst and chief market analyst for Rice Dairy, a Chicago trading brokerage.

Futures prices for milk and feed suggests an IOFC of more than $9 for every month of 2014, which would indicate a lot more milk production. Feed quality issues, however are hindering production increases in the U.S, but there will be higher production next year in the U.S. and abroad, he said.

IOFC is an indication of how things are going at the farm level. In general, the rule of thumb is that expansion starts to occur when IOFC is above $6.50 per hundredweight of milk for a period of time, said Sara Dorland, market analyst with CME Daily Dairy Report.

On a national level, producers are definitely seeing improvement, and it looks like that improvement will continue in 2014, she said.

California and Idaho haven’t seen IOFC level this high for 70 months, she said.

Based on USDA’s report of milk and feed prices received in October, the IFOC for California was $9.07 and Idaho’s was $9.04. But calculating things on a six-month rolling average of feed costs, those figures would be $7.25 and $7.58, respectively, she said.

The national IOFC of $10.57 based on USDA’s October prices would amount to $8.59 with the six-month feed costs calculation.

While feed costs are coming down, they haven’t quite worked themselves into the equation on the farm, where producers are using feed already purchased at higher prices, she said.

Another indicator of farm health is the milk-to-feed price ratio, which rose to 2.09 in October — the first month above 2.0 since March of 2011. A ratio under 2.0 generally means dairymen are losing money or are on the margin.